Dreaded deflation

Sept 04,2019

The consumer price index for the month of August dropped by 0.038 percent compared to the same month of last year. What that means is that inflation has fallen below zero percent for the first time since 1965, when the government started to gather related data. For consumers, that’s not bad news. But it means that Korea has to worry about low prices from now on. The fall in consumer prices during our current economic slump could signal the beginning of deflation, which can lead to slowed production, investment and consumption across our economy.

As the Bank of Korea cut its economic growth figure for the second quarter by 0.1 percent to 1.0 percent, Korea can hardly be sure of a growth rate in the 2 percent range this year. Deflation does not only mean decreases in prices but also signifies the painful process of a shrinking economy. If such a situation continues, we may experience the kind of “lost decades” Japan suffered in the 1990s and 2000s.

The size of Korea’s middle class is shrinking. According to the Ministry of Economy and Finance, the share of our median income group in the aggregate household income — a widely-accepted indicator of a middle class — decreased by 1.9 percent to 58.3 percent in the second quarter compared to last year. The share has continued dropping for four consecutive years since 2015, when it reached as high as 67.9 percent. The downsizing of the middle class was particularly noticeable since 2017, when the Moon Jae-in administration began. The liberal administration proposed to ease wealth polarization with an aggressive income redistribution policy. The effect has been the opposite.

Another concern is higher prices for services directly affected by drastic increases in the minimum wage and a uniform enforcement of a 52-hour workweek. People are increasingly worried about sharp food price hikes in restaurants as a result of the government’s relentless push for minimum wage increases. Even a sandwich or a bowl of noodles costs more than 10,000 won ($8.20). According to a Korea Consumer Agency survey, the price of naengmyeon, or cold noodles, rose by 12 percent in Seoul in a year.

Our economic woes are deepening due to the ongoing Sino-U.S. trade war, conflicts between Seoul and Tokyo, and worsened relations between Seoul and Washington. The government must tackle those challenges rather than denying the possibility of deflation. It must put our economy back on track by encouraging economic stakeholders.